News from DNB Markets

(19.05.2011)
Consensus in Fed for keeping rates low for an extended period and for fulfilling QE2. Fed discussed exit strategies, but first move still far away.

By Kyrre Aamdal, Senior Economist at DNB Markets

The Euro has been relatively stable versus the USD during the last 24 hours. The Norwegian krone has strengthened 0.5 per cent against the Euro and thus recovered some of the previous days' loss. Sterling fell 0.7 per cent against the Euro. The sterling fell almost continuously during the day. High unemployment figures contributed probably to the decline. The nominal wage growth is low, and with high price inflation the real wage growth is negative. This supports the view that high inflation in the UK is temporary and that the key policy rates will remain low for a long time. The Bank of England minutes did not provide new signals. The Monetary Policy Committee is still quartered: One for a 50 bps hike, two for 25 bps hike, five for unchanged policy and one for increased Gilt purchases. "The Committee’s best collective judgement was that, assuming Bank Rate moved in line with market interest rates, the chances of inflation being above or below the target were, as in February, broadly equal in the medium term". Market interest rates indicate a first rate hike late this year. We believe BoE will keep rates unchanged until spring 2012.

In U.S. the stock market recovered after three days of decline. Increase commodity pries and company results were among the main factors behind the increase. In Asia the developments have been mixed this morning.

Yesterday Fed released minutes from the FOMC meeting late in April. The attention value in the minutes was expected to be the different views from the committee members. The minute showed that all members agreed upon completing QE2. A few members remained uncertain about the benefits of the asset purchase program but, with the program nearly completed, judged that making changes to the program at this time was not appropriate.

The Committee continued to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, were likely to warrant exceptionally low levels for the federal funds rate for an extended period. That said, a few members viewed the increase in inflation risks as suggesting that economic conditions might well evolve in a way that would warrant the Committee taking steps toward less-accommodative policy sooner than currently anticipated. Some members pointed out that there would need to be a significant change in the economic outlook, or the risks to that outlook, before another program of asset purchases would be warranted; in their view, absent such changes, the benefits of additional purchases would be unlikely to outweigh the costs.

At the April press conference Bernanke talked about exit strategies. The minute reveals that this had been an important part of the FOMC meeting. The staff had given a presentation on strategies for normalizing the stance and conduct of monetary policy over time as the economy strengthens. The presentation noted a few key issues that the Committee would need to address in deciding on its approach to normalization. Participants noted that the Committee's decision to discuss the appropriate strategy for normalizing the stance of policy at the current meeting did not mean that the move toward such normalization would necessarily begin soon. Meeting participants agreed on several principles that would guide the Committee's strategy for normalizing monetary policy. Nearly all participants indicated that the first step toward normalization should be ceasing to reinvest payments of principal on agency securities and, simultaneously or soon after, ceasing to reinvest principal payments on Treasury securities. Most participants indicated that once asset sales became appropriate, such sales should be put on a largely predetermined and preannounced path; however, many of those participants noted that the pace of sales could nonetheless be adjusted in response to material changes in the economic outlook.